Automated Clearing House (ACH) transactions provide fund transfers between financial institutions that allow consumers to pay billing entities, such as merchants and/or service providers using the consumer's demand deposit account (DDA), such as a savings or checking account, maintained by a financial institution without requiring the consumer to write a check or use a debit card. To facilitate payment, the consumer provides DDA routing information associated with the DDA from which funds are to be withdrawn. DDA routing information is typically found in the magnetic ink character recognition (MICR) number at the bottom of paper checks. The MICR number generally includes a bank routing number and a bank account number. Anyone who has the DDA routing number and account number of DDA can access to the funds in the DDA. There are generally no restrictions that would prevent a fraudulent and/or unauthorized ACH transaction from occurring because verification and authentication are typically not performed and it is not until the consumer reviews his DDA statement that the fraudulent or unauthorized ACH transaction is detected.
ACH transactions are processed as bulk file transfers of information from a billing entity to the billing entity's commercial bank. The billing entity's commercial bank presents a hold list to the retail bank that maintains the consumer's DDA. The hold list can include the routing number, account number, and amount of funds to be withdrawn. The retail bank withdraws the funds from the DDA associated with the DDA routing information and transfers the withdrawn funds to commercial bank. There is typically no guarantee that funds will be available in the DDA when the billing entity enters an ACH transaction and there is typically no guarantee that the ACH transaction will not be rejected by the consumer forcing the billing entity to reverse the transfer of funds and return the funds to the consumer's DDA at the retail bank.
While there are several disadvantages to ACH transactions, ACH transactions are typically inexpensive compared to paper check transactions, credit card transactions, and debit card transaction. The cost of an ACH transaction can be any where from a couple of pennies up to 25 cents and consists of operation, management, risk, and fraud costs absorbed by the billing entity, acquirer, commercial bank, and/or the retail bank. ACH transactions are relatively inexpensive in part because the parties of the transaction generally do not collect a fee for providing an ACH transaction service. Instead, only the operational cost of handling of the bulk file request from the billing entity and the cost of transferring the money may be covered.
Retail banks are under increasing pressure to monetize their DDA assets at the same time that permissible solutions are under regulatory and consumer advocacy scrutiny. Recent changes in the Federal Regulation E and proposed rules under the Durbin Amendment are likely to draw significant revenues from the DDA environment in the next 12-24 months. Merchants are using what they perceive to be low cost Automated Clearing House (ACH) to complete transactions. But the actual cost—and the broader value proposition—does not effectively compete against potential solutions.
Accordingly, it would be desirable to provide a system and method of completing DDA transactions which is both cost effective and secure.